Meta Platforms Stock Soars Amid TikTok Uncertainty

META Platforms stock (NASDAQ: META) is experiencing a 5% increase over the past month, fueled by rising investor confidence surrounding a potential TikTok ban. A recent ruling from a federal appeals court requires TikTok’s parent company, ByteDance, to divest its U.S. operations by January 19, 2025, or face a ban. A TikTok ban could be beneficial for Meta, reducing competition in the social media field.

Strong Performance Compared to the S&P 500

Looking at a longer timeframe, META stock has delivered impressive returns—an 83% rise since early 2022, climbing from $335 to approximately $620. In contrast, the broader S&P 500 index has increased by only 28% during the same period. The robust 83% growth can be attributed to:

1. a 54% rise in earnings per share, from $13.77 in 2021 to $21.17 now;
2. a 19% increase in the company’s price-to-earnings (P/E) ratio, rising from 24.4x to 29x.

What’s Driving Meta’s Earnings Surge?

As the world’s leading social network, Meta Platforms connects users while generating revenue through targeted advertising. The company’s revenue has surged by 32.5%, increasing from $118 billion in 2021 to $156 billion in the last twelve months. This revenue growth is driven by more ad impressions and higher average ad prices. The number of daily active users across Meta’s platforms—Facebook, Instagram, Threads, and WhatsApp—has also grown by 17%, from 2.82 billion in 2021 to 3.29 billion now. The company’s commitment to leveraging AI for advertising has further enhanced its revenue prospects.

In addition to rising sales, Meta’s net income margin has improved from 33.4% in 2021 to 35.6% currently. The company has also reduced its shares outstanding by 8%, thanks to $122 billion spent on share repurchases. These factors have pushed earnings per share to $21.17, reflecting a significant 54% increase from 2021.

Factors Behind the Rising Valuation

Investors are optimistic about Meta’s stock due to the upsurge in ad impressions and the average price per ad, which signal strong sales potential. The company’s AI initiatives are seen as a vehicle for driving higher advertising revenues through improved user engagement and targeting effectiveness.

Compounding this positive sentiment is the ongoing discussion of a U.S. TikTok ban. However, recent news reported that ByteDance has filed for an emergency motion to delay the ban, causing META stock to dip nearly 2% following the announcement.

Is There More Room for META Stock to Grow?

Currently trading at about $615, META stock has risen 74% this year. Although this increase is considerable, the stock’s performance in the past few years has been unpredictable, showing annual returns swinging from 23% in 2021, to -64% in 2022, and then a striking 194% in 2023. Comparatively, the Trefis High Quality (HQ) Portfolio has delivered more stable returns against the S&P 500 during this period.

As we consider the current uncertain macroeconomic landscape—with potential rate cuts and geopolitical conflicts—META could either underperform like it did in 2021 and 2022 or experience remarkable growth in the next year. At present, we assess META’s valuation to be approximately $560 per share, slightly lower than its current price. The stock is now trading at 29x trailing earnings of $21.17, compared to an average P/E ratio of 22x over the past four years. This rise in valuation seems justified given recent advertising growth, but investors must weigh the uncertainties—especially the yet-to-be-seen impact of AI investments on earnings.

While META stock currently seems fully valued, it is beneficial to explore how Meta Platforms’ peers are performing on key metrics. Additional comparative insights can be found at Peer Comparisons.

[1] Returns as of 12/10/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.